30 corporate finance
Why does the Government not understand the tax laws?
Few Budgets have caused so much trouble to a sitting government as the Budget delivered by George Osborne back in March, writes Cormac Marum, Harwood Hutton tax partner
Since then various tax measures have been regularly making the headlines. First we had the debate over the cutting of the top rate of tax from 50p to 45p from April 2013 and then we had ‘granny tax’ - the freezing of the age related tax allowances for OAPs – followed by the row over charitable giving and whether that was really a form of tax avoidance before finally getting to ‘pasty tax’ – the imposition of VAT on over the counter food heated up before sale.
These arguments have very much taken the public’s focus away from the good aspects of the 2012 Budget such as the rise in the personal allowance, which benefits all basic rate taxpayers, and the measures which should encourage much needed investment in the UK economy such as the increases in EIS relief, the introduction of the new Seed EIS relief and the new freedom of non-UK domiciled individuals to make qualifying investments without triggering an up-front tax charge for investing in the UK.
It certainly shows that the Government has not got its PR right when it comes to tax policy. Normally this would just be a political failing but the recent row over the way certain senior public sector officials are paid suggests that the problem goes much deeper.
as if the Government itself does not understand its own tax rules.
Early in May, it was reported that Danny Alexander, the chief secretary to the Treasury, had sent a letter to the chancellor saying that more than 2,000 senior public sector officials are being paid through private companies rather than on the government’s payroll.
It is
claimed that under this practice vast quantities of tax somehow go unpaid and Danny Alexander has ordered that the practice be stamped out within three months.
If they really believe this, the Government simply does not understand its own tax rules. There is no vast amount of tax being unpaid if
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the Government applies the rules which are on the statute book already.
Let me explain how the tax rules operate.
If the public sector has a senior post, it can fill it either by employing an individual directly or by outsourcing the post.
If an individual is employed directly, he or she goes on the payroll and, like every other employee, pays income tax and national insurance under PAYE. This means the public sector employer has to pay employer’s national insurance at 13.8%.
If the post is outsourced, there is a contract between the public sector and a service company, which supplies the individual. As the public sector does not employ the individual, this arrangement does not go on the public sector payroll and the public sector does not have to pay employer’s national insurance at 13.8%. It is this saving which encourages outsourcing solutions and it’s a common commercial arrangement across the private sector.
It looks
Why does this not result in a loss of tax? Simply because the individual is now employed by the service company and he or she should go on the service company’s payroll and, like every other employee, pay income tax and national insurance under PAYE. This means that it is the service company which pays the employer’s national insurance at 13.8%.
Vast quantities of tax don’t go unpaid. The Exchequer does not lose out. Broadly, the same income tax and national insurance is paid. The only change is that the employer’s national insurance is paid from somebody else’s budget not from the public sector purse.
If the service company is owned by the individual concerned, there may be a temptation for him or her to pay themself a minimum wage and extract the rest of the money earned by the
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company by way of dividends. But such an arrangement will not work. It falls squarely within the ‘IR35 rules’ and they will reclassify such dividends as earnings broadly forcing income tax and national insurance to be paid.
Why does the chief secretary to the Treasury not understand all this? By forcing the public sector to turn its back on outsourcing solutions, Danny Alexander is needlessly increasing their costs while achieving no noticeable increase in the overall tax take.
Details: Cormac Marum 01494-739500
www.harwoodhutton.co.uk
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